A Blog About Nothing » Relationships

Economies of scale…

The Homo Economicus — Wed, 24 Feb 2010 02:57:22 +0000

These New Yorkean couples decided to marry together in the same place using the same limo the same day…

These guys really know about economics.

The cost of making new friends

The Homo Economicus — Tue, 17 Feb 2009 01:21:00 +0000

Would Jerry be friends with Newman if they would find themselves alone in Alaska?

Have you noticed that when you are out of town for a long period you become friend more easily of people from the same origin as you? Maybe even people that you knew before but you never thought of being his/her friend, but now, you hang out pretty much all the time. Why is that?
Well, yes, as everything in this blog has costs associated to, making friends has costs as well. When you grow up in the same place having the same friends since high school you’ve become very close to them. You know each other pretty well. And you have many and good friends.

So, what if now you find yourself in a new city, with no known people around? Well, you’ll have to make new friends. Why? Good question. Maybe is part of your utility function, to have friends. Let’s use that as an assumption.

But, what is the problem? Well, you’ll have to invest time and effort in making good friends as those you left home. So, again, you encounter yourself with the problem of equating the marginal utility of the every minute invested in a new friend with the cost of your time. You will have to start going out for beer with some people you met at the office or the school, and then you will be start to trust them more and more so that they will gain the benefit of being your friend. The costs sometimes involves the time, the cultural barriers if you are in a totally different place or the cost of giving out information to your friends so that you will receive information about them.
But… there is a much simpler way. If you knew that there is another person or group of people your age that are from your home country in that city, it would be rational to try to contact them – even if you already know them and you were never friends with them before. Why? Well, there is no cultural barrier to cross, if you know them from before so you may have already some information about them, and as you, they are also looking for friends. So it means that the cost of “friending” with those people is less than with strangers in the street or in your new job.

Ok, let me try a graphical explanation (yeah right!). I would say that in this case your utility function is convex at the beginning and the concave after some inflection point in terms of time. Meaning that the first minutes or hours that you “invest” on an individual so that he/she will be your friend are not that productive (you won’t become best friends after one beer). However, the more you invest, the more “effective” is every minute until a point, maybe when you are already very good friends, that spending another minute won’t make you more than best friends with him/her.

So my argument is that the process of being very good friends with the people of similar background as you is much more faster, because you don’t start at the beginning of the curve, but at some more advanced point in which the marginal return of time is much higher. So in that sense, the costs of being friends with these people are lower.

People know this, and that is why in many framework in which they want you to become friends with others (to improve the productivity of the firm or to make you having a wonderful college/graduate school experience) they promote activities to lower the costs of making friends. They set up time to make you talk to each other, and to make you realize that you may have similar backgrounds. Or this is why companies do their “team events” every here and then. This is lowering the costs of knowing the people around you and becoming friends. This can explain many initiatives of getting people together in conflict zones such as Israelis and Palestinians children, students or adults. Lowering the costs of knowing each other will increase the chances of becoming friends and will induce higher productivity in the future.

So don’t be surprised if you see Jerry and Newman becoming new friends in a very remote place… well, maybe not.

Online Dating and Search Costs

The Homo Economicus — Sun, 07 Dec 2008 17:11:00 +0000

So, what is it about online dating that is sometimes controversial or awkward? Well, I don’t know. But sometimes one thinks about online dating as something associated with people for whom is difficult to find a partner through “conventional” methods. And this is sometimes associated with people who is ugly or non-friendly or any combination of both. I will try in this post to convince you that this perception of online dating can be explained through economic theory.

The economic concept of “search costs” relates to the cost of transaction for buying a good. From my loyal source Wikipedia we have that “Rational consumers will continue to search for a better product or service until the marginal cost of searching exceeds the marginal benefit”.

Well, dating – or looking for a partner – has an associated search costs with it. You may think about it as the time you have to invest in going to places where there are people you could date, or investing the energy in thinking in strategies to approach the other person, or even you could think about the drinks and food you’ll have to pay in dating until you find the person that you are looking for. All this involves time and money. These are “search costs”.

However, we should think in this case – as opposed of the search cost associated with the “good” you want to consume – as a cost that it is associated to the consumer: the person that is looking for a partner. We could assume that search costs are the same for each individual (independently on which girl/boy he or she is searching for), but search costs are not the same across individuals. For instance, Pablito (a fictitious name) always has a hard time trying to invite a girl out – independently of which girl – he is very shy and he is not that handsome. So his search costs are constant. He has to ask 20 girls to go out with 1. He has high search costs. However, Juancito, is very handsome. He doesn’t even need to ask a girl out – because they come after him. His search costs are very low.

So the assumption for my “model” is that search costs are a function of your characteristics that are relevant for dating (how good looking and friendly you are, how funny you are, etc).

At this point, let me bring another ingredient. Online shopping (not dating!). What is the good thing about online shopping? Well, it decreases the search costs for each good. If you wanted to buy a computer in the early 90s, you had to go to 5 stores, and spend some time in each one, probably buy some magazines, in order to decide which is the best computer for you. The time and money you spent in doing all this – before you buy the computer – are search costs. So now, Google shopping and Amazon.com do all this for you. Also, online product reviews from buyers also help you with all this. You can fairly do all the 2-weeks research you would have done in the 90s for buying a computer in roughly one day through the internet. Search costs has been reduced sharply.

So, online dating is the same concept. What online dating is doing is that is reducing at some extent the search costs of people who want to date. Why? Well, you go into a website in which everybody else is looking the same as you, and you have all the “options” so that you can “see what suits you better” in only one place. You don’t have to go to 10 parties, and 5 social events in two weeks to see if you find one single person that is willing to date you. The search costs has been reduced.

So now, what is left is to understand who has the incentive then to do online dating. Clearly, people who want to reduce their search costs. It can be people who are less likely to find someone to date in their day to day life at the moment. But here I will add other components that affect the outcome of your search costs. Before I only included phisical characteristics and how friendly and nice you are. But there is information involved as well. People who lack of information on where to find other single people with the same interests also have search costs, either because they are new in town, or they are no longer in an enviroment where it is likely to meet new people every day (such as in college or graduate school). These are the people that are likely to join online dating.

People who have already low search cost don’t have too much of an incentive to join such a network. Going back to the definition at the top of the post, their marginal cost (the membership fee) exceeds the marginal benefit that they can get from online dating. But it doesn’t mean that “pretty” people will not join. Maybe “pretty” people are having a hard time looking for an specific kind of person that they are not able to find in their local environment.

So it might be that in the future, as almost everybody in developed countries have bought at least something over the internet, maybe more and more people will say that they have dated at least one person thanks to the internet. We’ll see…

Relationships and Dominant Strategies…

The Homo Economicus — Wed, 08 Oct 2008 04:00:00 +0000

Well, yes, I know what your first thoughts are. There is no way we can explain relationships with economic science. But let me tell you what I think. As in my first post, everybody acts on a rational way, seeing his own set of information, and having their own incentives to achieve a better utility… And so do men and women in relationships.

So, first of all, I want to introduce you the prisoners’ dilemma. This is a classic game theory example, in which we can see that, sometimes, when one’s outcomes are also determined by other individuals, our strategy as individuals won’t necessarily be the ones that will lead us to the highest outcome or utility.

Consider the following situation (Source: Wikipedia):

“Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies (“defects”) for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?”

What do you think? The most ‘rational’ thing to do is that both of them remain silent, and they will serve 6 months each, and we are done. However, if prisoner A stays silent, then prisoner B can testify, and he will go free, while A will be sentenced to 10 years in jail. So A cannot take that risk, he will prefer to betray B, even though he will be better off if both A and B remain silent. So the dominant strategy will be ‘mutual betrayal’, and each of them receiving a five-years sentence, which is clearly not the best outcome they could have achieved if they would have agreed beforehand.

This is similar to women and men behaviors in relationships. When a man starts dating a woman, and they happen to like each other, they will probably want, at least at the beginning, to talk over the phone all the time, or see each other all the time. In many cases this indeed happens, and they are a happy couple – the happiest they can be.

However, this is probably not the common case. Why? Well, if the girl starts calling the guy too much, or vice-versa, then they will be giving a signal to the other that they are “easy to catch”. But usually, in relationships you don’t want this to happen. Girls want to be seduced, and see the man working hard to achieve that. Similarly, men don’t want girls to think that they are too crazy about her or that they don’t have other girls that they can invite as well. Both men and women choose a strategy, the “hard to get” strategy, in which they don’t pay too much attention to the other one…

So what does this have to do with game theory? Well, this is a game. Both the man and the woman will be better-off by avoiding all these “hard to get” games. They will be able to save some time, and avoid uncomfortable situations. But in any case, the equilibrium is to play it the hard way.

Why? Imagine player one stops playing the “hard to get” strategy – and say starts calling more or caring more than usual for the other. Then player two can play two strategies. He/She can respond in the same way, and if they both keep playing that strategy without deviating, they might reach a better outcome. However, if player two decides to play back the “cooperative” strategy, but player one in response starts playing the “hard to get” strategy, then player two will look like an idiot… Player two will be calling and inviting player one, while player one will be indifferent and rejecting some of the invitations at a certain rate. Player two will feel bad about it, and will understand that player one is playing “hard to get”. What is the only response to that? Choosing as your optimal strategy the “hard to get” one.

We finally reach an equilibrium in which men and women choose to play a “hard-to-get” strategy being this one the dominant strategy. And sometimes, even though this can have a positive outcome, it won’t be as high as the other equilibrium (both playing the “cooperative” strategy)… at least in terms of time and avoiding uncomfortable moments.

So, you see… people are rational…